isen.blog

David S. Isenberg's musings about loci of intelligence and stupidity.

Tuesday, April 29, 2008

Junk Economics Wrong on Oil

It is one thing to do basket-of-apples gedanken experiments but the real world is just a weeeeee bit more complicated. Some of my friends deny the peak oil hypothesis, aka Hubbert's Peak, even though the scientific underpinnings are clear, the confirming evidence gathers and the disconfirming evidence is nowhere in sight.

In today's New York Times, in an article entitled Oil Price Rise Fails to Open Tap, the words "peak" and "oil" are not found together, but the article is chock full of confirming evidence for peak oil, to wit:

A central reason that oil supplies are not rising much is that major producers outside the OPEC cartel, like Russia, Mexico and Norway, are showing troubling signs of sluggishness. Unlike OPEC, whose explicit goal is to regulate the supply of oil to keep prices up, these countries are the free traders of the oil market, with every incentive to produce flat-out at a time of high prices.

But for a variety of reasons, including sharply higher drilling costs and a rise of nationalistic policies that restrict foreign investment, these countries are failing to increase their output. They seem stuck at about 50 million barrels of oil a day, or 60 percent of the world’s oil supplies, with few prospects for growth.

“According to normal economic theory, and the history of oil, rising prices have two major effects,” said Fatih Birol, the chief economist at the International Energy Agency in Paris. “They reduce demand and they induce oil supplies. Not this time.”

and

At the same time, oil consumption keeps expanding. Global consumption is forecast to increase by 1.2 million barrels a day this year, to 87.2 million barrels a day, with much of the growth in demand coming from China, India and the Middle East, according to the International Energy Agency, a group that advises industrialized countries.

(expanding consumption is one leg of the peak oil hypothesis) and

“What is disturbing here is that things seem to get worse, not better,” said David Greely, an analyst at Goldman Sachs. “These high prices are not attracting meaningful new supplies.”

The outlook for oil supplies “signals a period of unprecedented scarcity,” Jeff Rubin, an analyst at CIBC World Markets, said last week. Oil prices might exceed $200 a barrel by 2012, he said, a level that would very likely mean $7-a-gallon gasoline in the United States.

Some regions are simply running out of reserves. Norway’s production has slumped by 25 percent since its peak in 2001, and in Britain, output has dropped 43 percent in eight years. Production from the giant Prudhoe Bay field in Alaska has dropped by 65 percent from its peak two decades ago.

and

“It’s a crunch,” said J. Robinson West, chairman of PFC Energy, an energy consulting firm in Washington. “The world is not running out of oil, but rather it’s running out of oil production capacity.”

(a decline in global production is the other leg of the peak oil hypothesis) and

Mexico, the second-biggest exporter to the United States, seems increasingly helpless to find new supplies to offset the collapse of its largest oil field, Cantarell. . . . Russian energy officials warned recently that the days of stunning growth that followed the collapse of the Soviet Union were over . . . Saudi Arabia, the world’s top oil exporter, is completing a $50 billion plan to increase capacity to 12.5 million barrels a day, but it signaled recently that it would not go beyond that. That means Saudi Arabia could fall short of the 15 million barrels a day that most experts had expected it to produce in the long run . . . OPEC will need to pump 60 million barrels a day by 2030, up from around 36 million barrels a day today, to meet the projected growth in demand. Analysts say that without Iran and Iraq — where nearly 30 years of wars and sanctions have crippled oil production — reaching that level will be impossible.

but . . .

Not everyone is pessimistic about energy supplies. A study by the National Petroleum Council, an industry group that provides advice to the secretary of energy, concluded that the world still had plenty of petroleum resources that could be tapped.

I sure hope that the "experts" at the National Petroleum Council tell the oil producing nations where all this untapped oil is in a hurry . . .

Hubberts orignal "theory" as published in the 1950's on the future of Texas oil product was received with much scorn. Your "newspaper citing" validation technique is exactly how Hubbert confirmed his own theory about peak-oil for the wells located in the state of Texas. Basically, there was a newspaper article in 1971 which reported that the "Texas Railroad Commission" (the organization which to this day still controls drilling in Texas) confirmed that Texas crude output fell below growing domestic demand. In the years thereafter, the USA shifted from a net producer/exporter of its own petroleum to a net importer and the gap between domestically produced oil and imported oil continues to grow to this day.

There's two things going on here. First, is that markets take time to work, just like governments. When government doesn't act immediately, do you call it "junk government"? No, of course you don't.

Second, the less free a market is of government interference, the less efficiently it works, and the more time it will take to act on market signals. For example, I've heard that a full dollar of the price of gasoline is a war premium. Come next November when a Democrat gets elected, declares victory, and brings the troops home, and that premium disappears, what happens to the people who invested in greater oil production? They're screwed. They don't want to be screwed and when they can anticipate being screwed by future events, they do nothing.

The more politicized a market, the less well it works. That oil markets work poorly is completely predictable.

I've spent some time with serious geophysics and petroleum engineering types in the past year and they would agree that we are at peak "easy" oil. There is quite a bit more that is anywhere from hard to spectacularly hard to spectacularly wrong to get at - and bringing the new fields online can take 10 to 20 years.

Couple this with the spectacular energy demand in India and China and you have interesting price forcings with interesting geopolitics.

Last October on the the oil guys said (with people thinking he was a bit crazy) suggested $4 gallons this Summer and the potential for $7 gallons ($200 BBL oil) if "W does something stupid in the mideast" -- this struck me as a strange statement as he has already done something stupid in the mideast)

Some general predications of the group were step elevations in oil prices for several years until coal to gas or coal to liquid can be brought online massively (10 years with crash programs). Of course these have terrible environmental consequences - worse than burning oil.

The "silver lining" is that major economic collapses will slow the demand and may be the best thing going to deal with global warming given our less than stellar performance in that area.

The bleakest two weeks I have ever spent.

The Great Game indeed...

___

a side note .. we really need to start worrying about real conservation, not the faux conservation that engineering efficiency buys

"First, is that markets take time to work, just like governments. When government doesn't act immediately, do you call it "junk government"? No, of course you don't."

Actually, come to think of it, I believe that's a perfect label for governments run by junk economists . . .

Then Russell says, " the less free a market is of government interference, the less efficiently it works," and we're back to gedanken experiments. Show me a market that is free of government interference! We need an economics based in reality, where government "interference" hurts and/or (yes, even) helps.

Russell has "heard that a full dollar of the price of gasoline is a war premium." Well I heard that my friend's friend saw Elvis in the supermarket the other day. . . . and what happens to the people who invested in The Beatles when Elvis cuts a new record. Screwed, I tell ya.

Market-shmarket, government-shmovernment, there are two basic problems: 1) increasing global demand and 2) steady or falling production. These are aggravated by the dependence on oil of everything from agriculture to transportation. When the gap between supply and demand hits the fan, it will matter little what kind of government (or government interference if you must) a nation has or how its economy runs.